February 22, 2023
The U.S. Securities and Exchange Commission (SEC) recently announced that it waived a timing requirement and awarded $37 million to a whistleblower. $29 million was attributed to a Covered Action while $8 million was attributed to a Related Action. The award decision is significant because of the way the SEC interpreted its Related Action rule. It is also notable because the SEC exercised its authority to waive a filing requirement that would have precluded an award.
The SEC Whistleblower Program provides for the payment of awards in both “Covered” and “Related” actions. The SEC brings Covered Actions for violations of federal securities laws. Related Actions, however, are actions brought by certain other regulatory and law enforcement authorities such as the Department of Justice. In mid-2022, the Related Action rule was amended to include additional other whistleblower programs and add discretion to consider the dollar amount of the award.
The $8 million given to the whistleblower for a Related Action is one of the key aspects of this award. The contribution of the whistleblower to the related action was relatively minimal. According to the SEC’s order, the whistleblower’s anonymous tip initiated the company’s internal investigation and the SEC’s investigation. The whistleblower also submitted multiple anonymous tips throughout the course of the investigation. The misconduct charged in the related action, however, was broader than what was reported in the tips. Indeed, the whistleblower’s specific allegations were not even included as part of the charges brought in the Related Action. Despite these factors, the SEC broadly construed its Related Action rule when determining the whistleblower’s eligibility for an award.
However, these factors appear to have caused the SEC to reduce the award given for the Related Action in comparison to the Covered Action. Because the SEC’s Order redacts the amount of the sanctions collected and the percentage awarded to the whistleblower, the weight assigned to these factors by the SEC is not fully apparent.
To be eligible for an award, a claimant must voluntarily provide original information that leads to a successful SEC enforcement action. For whistleblowers who opt to report information internally via a company’s compliance, legal, or whistleblower program, SEC Rule 21-F(c)(3) sets out four steps a whistleblower must satisfy to be eligible for an award from the SEC. The first step is to “(1) report original information through an entity’s internal whistleblower, legal or compliance procedures before or at the same time he or she reports to the Commission … .”
The SEC found that the claimant did not satisfy this requirement. Instead, the claimant submitted his or her tip to the SEC. About 6 months later, claimant sent an email directly to the company making substantially the same allegations. However, the SEC exercised its discretionary authority to waive the requirement for both the Covered Action and the Related Action. It determined that doing so would be in the public interest and consistent with the protection of investors.
Of particular relevance to the SEC was that the claimant was an outsider to the company. Yet the claimant made persistent efforts to alert the SEC and the company. The company opened an internal investigation and hired outside counsel to conduct it. Then reported the allegations to the SEC. As a result, “the principal objective of Rule 21F-4(c)(3) – to encourage internal reporting, thereby allowing a company the opportunity to address the conduct – was satisfied here.”
The Whistleblower Law Collaborative has secured awards for clients in several SEC whistleblower cases. Including an award of more than $17 million to a whistleblower represented by Suzanne Durrell and Bob Thomas.
Whistleblower Law Collaborative LLC, based in Boston, devotes its practice entirely to representing clients nationwide in bringing actions under the federal and state whistleblower laws and programs, False Claims Acts and other whistleblower programs. We have extensive experience representing whistleblowers in False Claims Act and SEC matters.
If you are considering submitting a tip, complaint, or referral to the SEC or are aware of other types of fraud, contact us for a free, confidential consultation.